Oil Bonds in India

The mechanism for oil bonds was devised in 2005-06. The oil bonds issued by the government typically have maturities of ranging between 5-7 years, although maturities can be up to 20 years. Oil companies used these bonds to sell them in the bond markets or to use as collateral to raise cash. But there were several issues with them.  Firstly, the Indian oil bonds were not given Statutory Liquidity Ratio (SLR) status by RBI. This implied that they could not be counted as the verifiable liquid assets in the reserves of Indian banks to make up requisite SLRs. This had an adverse implication upon the tradability of oil bonds on secondary bond markets. Secondly, government released different kinds of bonds such as farm bonds and fertilizer bonds, causing a significant bond market glut in India. The OMCs had compete in buyers’ bond markets to sell their fixed-yield assets, leading to falling bond prices.